Positioning Now to Capture the Benefits of Global Outsourcing

Economist Pharmaceuticals Roundtable

Wednesday, November 17, 2004

Positioning Now to Capture the Benefits of Global Outsourcing

Christopher White, Vice PresidentPharmaceuticals and Healthcare Practice

A.T. Kearney 9/6187 2

• Blockbuster drug launches dropfrom 14 in ‘03 to 4 in ‘08

• By ’08, patent expirations will account for $72 B in current sales

14

99

4

5

3

Decline of blockbuster

fueled growth

‘08‘03 ‘08‘03

Increase in patent

expirations

Blo

ckbu

ster

La

unch

es

US

Sale

s of

pat

ent

expi

ratio

ns ($

, Bn)

• Pharma’s G&A expenses are significantly higher than otherindustries

Industry

High G&A costs

G&

A c

osts

Pharma

17%

Source: Parexel’s Pharmaceutical R&D Statistical Sourcebook 2004/2005A.T. Kearney analysis, 2004

Declining R&D output and high costs continue to pose challenges for industry profitability

28%

6

13

12

16

12

13


At last year's conference, we estimated a performance gap of $39 B

Projected U.S. Revenue Performance Gap1 (USD, BB)

1 Companies: AstraZeneca, Aventis, BMS, Eli Lilly, GSK, Merck, Novartis, Pfizer, Schering-Plough and WyethSource: A.T. Kearney analysis

In-line Product Growth

Patent Expiries

New Products

New Pricing

Pressures

Revenue GAP

’02 Actual Sales

’07 Sales

$99

$160

$33 $(30) $27($9)

$39

10% / Year10% / Year


Twelve months later, growth prospects have not improved

Projected U.S. Revenue Performance Gap1 (USD, BB)

1 Companies: AstraZeneca, Aventis, BMS, Eli Lilly, GSK, Merck, Novartis, Pfizer, Schering-Plough and WyethSource: A.T. Kearney analysis

In-line Product Growth

Patent Expiries

New Products

New Pricing

Pressures

Revenue GAP

’03 Actual Sales

’08 Sales

$103

$166

$30 $(25) $19($9)

$48


Control cost

Increase productivity

Speed up new product development

Expand skills and capabilities

GlobalOutsourcing

In response, the pharma industry is beginning to take critical steps – including global outsourcing

Action Steps


Global Outsourcing Primary Research

Our perspective on global outsourcing is based on extensive research

“Outsourcing Among Pharmaceutical and Biotech Firms” –CFO Research Services/A.T. Kearney Report 2004

• 14 in-depth interviews with CFOs/finance executives from leading pharmaceutical and biotech firms, e.g.:

– Bristol-Myers Squibb Co.– Wyeth– Genentech, Inc.– Genzyme Corp. – MedImmune, Inc.– Endo Pharmaceuticals Holdings, Inc.

Pharmaceutical R&D Offshoring Study – A.T. Kearney 2004

• In-depth interviews with Indian pharmaceutical companies and MNCs with a significant presence in India

“Where to Locate” – A.T. Kearney Global Business Council 2004

“Global Outsourcing Cross Industry Survey” –A.T. Kearney 2003

• 12 months study• 120 participants


Research shows that global outsourcing can accelerate growth

The financial services industry is the furthest along

The pharmaceutical industry has not yet fully seized the advantages of global outsourcing

A few pharmaceutical companies are out in front

Global outsourcing can enhance profitability


Stage 5Global Operating

Model

Stage 4Strategic Supplier

Management

Stage 3Value Realization

Stage 2Proof of Concept

Stage 1Capacity

Augmentation

Scale• 4 – 5 distinct

medium scale projects

• Common processes and tools for global outsourcing applied across business units

• Offshore targets established at a business unit level

Typically, industries progress through stages toward reaching benefits of global outsourcing

Outsourcing Industry Lifecycle Curve – Industry Leader Definitions

Source: A.T. Kearney analysis

TransformedGlobal Operating

Model• Offshoring is

integrated as a holistic part of the new business model

• Includes offshoring back-office business processing for non-core (e.g., HR) and some core functions (e.g, R&D/ Engineering)

Offshore as a KeyElement of

Strategy• 1 – 2 strategic

supplier relationships

• Offshore targets established at an enterprise level

Key Focus

Characteristics

Contract Labor

• Onsite contract labor used to augment on-shore resources

• No global outsourcing currently undertaken

Small OffshorePilots

• Small scale pilots on a one-off basis; little coordination between pilots



Model


Management



Stage 1Capacity

Augmentation

The gap between financial institutions and the pharmaceutical industry presents an opportunity

Offshore Industry Lifecycle Curve – Industry Leader Definitions


Key Focus

Adoption Stage / Examples

UtilitiesSouthern Company

AEP

Pharmaceuticals

Automotive

Ford

Financial Institutions

GE, Citi, Amex, HSBC

Other

Consumer Products & Retail

P&G, Nestlé



Model


Management



Stage 1Capacity

Augmentation

There are a few early adopters

Offshore Industry Lifecycle Curve – Pharmaceutical Industry Example


Key Focus


GSK is a leader in R&D outsourcing

Wyeth has outsourced 100% of API manufacturing and clinical data managementBMS

Abbott

Pfizer

JnJNovartis

AZ

Wyeth

GSK

AventisLilly


Results of Global Outsourcing – Financial Companies -

Global Outsourcing - Financial Companies -

Source: A.T. Kearney Survey, Spring 2003

Companies Choosing India for Global

Outsourcing

Companies that Have Already Met Corporate

Goals with Global Offshoring

Companies with no Global Outsourcing

Companies Engaged in Global

Outsourcing

36%

64%

50%

90%

The financial services industry has demonstrated that the benefits can be significant


Note: (1) A.T. Kearney Survey, 2003

Top reasons for global outsourcing – Financial Services(1) –

Cost Reduction

Higher Productivity

Improved Service Levels

Capacity Growth

Expanded Skills & Capabilities

93%

64%

42%

39%

30%

Control cost

Speed up new product development

Expand skills and capabilities

Action Items– Pharmaceutical –

Financial services experienced challenges similar to those faced today by pharmaceuticals

Increase productivity n



Pharmaco A Pharmaco B

• Value Realization – Aggressively pursuing global outsourcing (core and non-core)

— Clinical data management— Clinical trials— Manufacturing— IT— Finance— HR— Payroll

• Proof of Concept/Value Realization – Actively pursuing global outsourcing of core processes and selected non-core processes

— Research (discovery)— Chemical process

development— Manufacturing— IT

• Proof of Concept –Limited global outsourcing for non-core and core processes

Core Non-Core Non-Core

Pharma is taking various approaches in outsourcing core and non-core processes

ITResearch

Manufacturing

Clinical Development

Chemical ProcessDevelopment Payroll

Finance

HR

CoreITResearch

Manufacturing

ClinicalDevelopment

Payroll

Finance

HR

ITResearch

Manufacturing

Clinical Development

Payroll

Finance

HR

Pharmaco CCore Non-Core

Chemical ProcessDevelopment

Chemical ProcessDevelopment


Perceived Risk Factors in Global Outsourcing

Low tolerance for error

Business continuity and concerns about delays

Demands of regulatory compliance

Loss of intellectual property

Political instability in offshore country

The industry has delayed adoption of global outsourcing because of potential risks


The business case for global outsourcing is compelling – $5B to $8B in annual savings

0

20

40

60

80

100

120

140

$127 $71

Total G&A

G&A that can’t be globally outsourced or already outsourced(1)

G&A spend globally

outsourced after 10 yrs

$(Billions)

Notes: (1) Based on GE’s rule for outsourcing. Conservatively, it is assumed that 5% of offshorable spend has already been acted upon(2) The cost savings from global outsourcing has been estimated to be 30% based on wage rate differences

$56

Globally outsourcable G&A spend

G&A spend globally

outsourced after 5 yrs

$17

$ 8 B$ 5 B

Savings after 10 years

Savings after 5 years

$28

30% Cost Savings(2)

Top 10 Pharmacos – Estimated G&A Savings


Global outsourcing provides additional benefits beyond cost savings

• Access to expertise• Increased speed and flexibility• Process improvements• Variable versus fixed costs• Avoidance of capital outlay

Advantages of global outsourcing for pharmaceutical companies


Take action now – or you will lose the advantage

1. Learn from leading industries about best practices

2. Critically explore ways to migrate activities – make it a global exercise or you will miss the additional advantage of going offshore

3. Be prepared to manage new complexities

4. Choose a business model that reflects your organization’s risk and return profile


1900 2000 2002 2004

Global Research Center,

Niskayuna, NY>1,600 employees

Global Research• GE 90 Fan Blades• Open Field MRI• Advanced Airfoils

John F. Welch Tech Center, Bangalore1,600 employees1

Global Research• Color Technology• Power Electronics• CFD

China Technology Center, Shanghai100 employees

Global Research• Microturbines

Global Research, Munich~100 employees

Global Research• Alternative Energy• Imaging• Sensors

•Work with the best –leverage global centers

•Accelerate R&D•Expand capabilities•Leverage lower-cost resources

•Bring in fresh ideas

Overall R&D Strategy

Source: GE, A.T. Kearney studyNote: Plans of expanding the strength to over 3000 soon

1. Learn from leading industries – GE’s Bangalore center filed 95 patents in three years

Progress of GE’s global research capabilities


2. Critically explore opportunities – some pharma companies are leveraging India’s strengths in global outsourcing

Testing Waters

EmbryonicScope of

Operations

LowLow

High

High

Early Adopters

Focused Strategy

PfizerJ&J

GSK

Novartis

MerckAventis

BMS AZ

Wyeth

Eli Lilly

India Advantage Adoption Matrix of Global Pharma Companies

R&D

Discovery

Bio Informatics

Clinical trials

• Center of Excellence for TB drug discovery

• None

• Limited global trials; exploring global trials for TB (2006)

Scale of Operations


Complexity of FunctionLowHigh

Low

Maturity of Supply Market

Drug SubstanceDrug Substance

High Level 1Level 1Level 2Level 2Level 3Level 3

Pharmaceutical R&D Pharmaceutical R&D

BioProcess R&DBioProcess R&D

3. Be prepared to manage new complexities

R&D Illustrative Example

Safety AssessmentSafety Assessment

GMP ComplianceGMP Compliance

Analytical MethodsAnalytical Methods

Drug Metabolism


4. Choose a business model that reflects your organization’s risk and return profile

CaptiveCaptive

Alliances / JV

Alliances / JV

Contract/OutsourceContract/

Outsource

Pros Cons Sample Functions

• Research• Clinical development• High touch customer

services

• Lower business risk & investment

• Process control• Accelerated time to

market

• Management and contractual complexities

• Skill transfer to partner• Capital investment

• Clinical trials• Chemical process

development• Manufacturing

• Higher cost savings• Maximum speed –

accelerated benefits• Increased flexibility• Minimized capital

investment

• Less control of processes and output

• Risk of public reaction to job loss

• Less protection of intellectual property

• IT• Accounts

receivables/payables• Payroll


• Maximum control• Process consistency • Protection of

intellectual property

• Lower cost savings• Higher capital outlays• Increased start-up time



Model


Management



Stage 1Capacity

Augmentation

Pharma needs to position now to capture the benefits of global outsourcing

Offshore Industry Lifecycle Curve – Industry Leader Definitions


Key Focus


Pharmaceuticals

• Global outsourcing is a reality

• The opportunity for the pharmaceutical industry is significant

• For companies that move now, it’s an opportunity; for those that delay, it’s a threat

Documents

Positioning Now to Capture the Benefits of Global Outsourcing